Clearing debt guides

Cure the debt hangover from your student days

When you are a student, money tends to be the last thing on your mind. But as the heady days of student-hood become consigned to the realm of nostalgia, it is time to pick up the tab.

Reality might begin to bite when you find yourself landed in thousands of pounds worth of debt, money flowing out of your account that you can not keep track of, and a credit history tarred from years of abusing credit. However, there are some quick and easy steps you can take to get your finances back on track; here is how.

Clean up your overdraft act

While your overdraft may have seemed like your best friend during your student days, now you are no longer studying - and benefiting from the cheap credit that a cynic would suggest banks only offer to entice you into debt - it is likely to be more of a curse, particularly if it has become a permanent state of affairs.

Most student current accounts give you a grace period of a year or so to pay off your overdraft before hefty interest rates and other charges are added, so you will need to act before it starts costing you dearly but how?

Cut the cost of your balance in the red - to do this you essentially have two options:

Transfer to a new overdraft account: The aim here is to get an account that will accept your outstanding overdraft and make it cheaper or, ideally, interest free while you work on paying it off.

If you are a recent graduate then you should first look at switching to a specific graduate current account - this does not necessarily have to be with the same bank as your student account - as most offer interest free overdrafts for two or three years after you graduate.

If it has been a while since your student days but you have never made it out of your overdraft then a standard current account with an interest free overdraft is worth considering. Alternatively, you could look at moving the balance to another interest-free home such as a balance transfer credit card.Transfer to an interest-free credit card: 0% balance transfer credit cards that offer money transfers could help you to significantly cut the cost of your overdraft balance. Using one of these cards you will be able to pay off your overdraft balance by moving the debt onto the credit card. You will then be able to work at paying it off without any more interest being added.

Of course, the biggest drawback of using a 0% balance transfer cards is that that interest free period will only be temporary, often between three and 18 months long. If you have not cleared your overdraft by the time this deal is up you will need to move the balance again. You will need to pay a handling fee (usually around 2 - 3%) each time you shift your balance too.

If you do not fancy having a time limit imposed on you then you should also consider moving your overdraft debt to a lifetime balance transfer card. Lifetime balance transfer cards will apply a low rate to your borrowing until you clear the balance, however long that takes.

Clear the balance

Once you have your overdraft balance cornered on an interest-free card or current account, you can work on clearing it for good so that that part of your student debt hangover is wiped out.

Sort out the state of your credit cards

It may be that you ran up thousands of pounds worth of debt on credit and store cards while you were at uni; and it is only now, as you begin to look at the state of your finances, that you realise just how much you've spent on them during the last few years.

Again, the best course of action is to simply pay these off if you have the means to, but as you are unlikely to have a spare thousand pounds laying around in the post-student fall-out, your options are to make the credit card balances cheaper by transferring them elsewhere, then working on paying them off over time.

Transfer to an interest-free credit card

This would mean taking part or all of your outstanding credit card balance and paying it off by transferring it to a 0% balance transfer credit card. Remember that this 0% period will be temporary, and also there will be a handling fee applied to transferred balances.

When you have moved some of your balance to this new card you will not be paying interest on it anymore, so you can look at how long the interest-free period lasts and work on paying it off before then.

Transfer to a lifetime balance transfer card

If you think you will not be able to abide by the rules of a 0% balance transfer card (i.e. paying the balance off in full before the interest-free period is up), your best option is to move your outstanding credit card balance to a lifetime transfer card. As described above, these keep a low interest rate fixed on your balance until you pay it off. This means you can work on clearing your debt without accruing alarming amounts of interest.

Prioritise outstanding loans

If you have taken out a personal loan while you were a student, you will have to look at how to make this cheaper too by paying it off or transferring the balance to an interest-free home, although these are a little more tricky and you will have to look at the loan terms carefully to avoid being charged for paying off the loan early, for example.

Otherwise, the biggest loan on your mind is likely to be your student loan, which could be as much as £20,000 by the time you graduate.

Figures like this can be alarming to say the least, especially when you barely have enough in your pocket for basic living expenses. The best thing to do about this whopping loan however is not to worry too much about it.

Firstly, you will only have to begin paying back that loan when your earnings exceed a certain threshold (currently £21,000 per annum). At that point a relatively small amount from your wages will begin to be automatically deducted and put towards your outstanding student loan.

It is also worth noting that your student loan is likely to be the cheapest loan you will ever receive. The current state of the economy means the interest rate on your loan is likely to be negligible, or even non-existent. As such there is no immediate pressure for you to pay it off right away, especially when you have other debts that are costing you more. Read our guide on whether or not you should pay off your student loan early.

Another outstanding loan that might be on your mind is money that was lent to you by family and friends during the course of your days as a student. Hopefully these will not be accruing interest which means they are not a priority to pay off if you have other debts that are not interest-free; but you should still work on paying these off as soon as possible if you want to stay on the right side of your nearest and dearest.

Tidy your credit report

This may be the first time in your life that you have thought about your credit report, and it is essential to get it in shape so that you do not have problems in the future with getting credit when you really need it - for getting a mortgage for example, or financing a new car.

Having no fixed abode and moving around a lot while you are a student, as well as missing payments on credit cards and racking up debt in your overdraft, can mean your credit report comes out of the whole experience a little worse for wear.

As such the first thing you should do is check your credit report. This will show any defaulted payments from the last few years as well as the last addresses you are recorded as having lived at.

Check that all the information is correct; for example if you see an address listed that you have never lived at or an account opened in your name that has nothing to do with you, you should contact the credit agency and inform them of the right information.

You can then start taking steps to rebuilding your credit rating and creating a solid credit history. Obviously this will mean making all future payments on credit on time, whether that is on your mortgage, a credit card, or a personal loan. You can also do things to make yourself look like more of a 'stable' borrower by registering to vote; read our guide for more details on how to improve your credit rating.

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